Britain's banking market

A breath of fresh air

A shake-up is possible—but only if customers shop around more

CONSUMER groups have long worried about a lack of competition in Britain's personal-banking market. Waves of consolidation over the years have left it more concentrated than, for example, that of the United States. Consumers have remained highly reluctant to switch their current accounts (checking accounts, as Americans call them) because it can be so cumbersome, even though they have become quite used to shopping around for other utilities (see chart below). Forced mergers and takeovers during the financial crisis made things worse: the governor of the Bank of England, Mervyn King, has expressed worries that the resulting megabanks are too big to fail, and thus should be broken up.

Now, with some of the rescued banks' branches being put up for sale, and several ambitious new entrants seeking to grab a significant share of the market, there is the chance of a better choice for bank customers. On April 6th bidding closed for 318 branches of the Royal Bank of Scotland (RBS)—in which the taxpayer now has an 84% stake—that are being sold on the orders of the European Commission, as a quid pro quo for its state rescue. Depending on who wins, the sale could be a first step on the road to ending the oligopoly enjoyed by Britain's big four—RBS, HSBC, Barclays and Lloyds.

If Santander, a big Spanish bank, wins, not much may change. It has already mopped up several medium-sized British banks—Abbey and Alliance & Leicester, and the branch network of the state-rescued Bradford & Bingley—and is amalgamating their combined 1,300-odd branches into a single outfit. Another potential consolidator is National Australia Bank, which already owns the mid-sized Yorkshire and Clydesdale banks. But Santander's main domestic rival, BBVA, which so far has little presence in Britain, has also bid for the RBS branches. And so has JC Flowers, an American private-equity investor and serial buyer of banks in the Netherlands, Germany and Japan.

Potentially the most significant bidder is Sir Richard Branson's Virgin Money, which recently bought a tiny regional bank, Church House Trust, to use its licence to launch a big push into personal banking. If it fails to win the RBS branches it may go after other banking operations that are coming on to the market: the still-active part of the rescued Northern Rock is to be sold, as are at least 600 branches of Lloyds, which took over the ailing HBOS during the crisis. This week it was confirmed that Wilbur Ross, an American investor, was ready to put up to £500m into the Virgin venture.

Among other new entrants to come is Metro Bank, backed by Vernon Hill, an American bank founder. It got its licence from the Financial Services Authority in March and plans to open up to 200 “customer- and dog-friendly” branches around Greater London. Walton & Co, backed by Panmure Gordon, an investment bank, is a more modest venture into family banking in selected market towns, still waiting for its licence. Sweden's Handelsbanken is also planning to increase its small branch network in Britain, and the huge Bank of China is also seeking a share of the British mortgage market.

The new competitors may struggle to loosen the existing big four's grip on the market

Given the cost and complexity of creating branch networks from scratch, and the even greater challenges involved in absorbing and integrating existing branches, with their often outdated information-technology systems, the new competitors may struggle to loosen the existing big four's grip on the market. However, there are two other, far stronger, potential contenders with better chances of taking a decent share.

One is the Post Office. It does not have a banking licence of its own but provides an outlet for some of Bank of Ireland's banking services, and allows customers of 12 other banks to use the 11,500 post-office counters across Britain. The Post Bank Coalition, combining trade unions, think-tanks and the Federation of Small Businesses, is pressing for the Post Office to abandon its joint ventures and become a fully-fledged, publicly owned bank for individuals and small firms, something like the mighty Japan Post.

Tesco wants a 10% share of the banking market

Another, whose plans to become big in banking are already well advanced, is Tesco, Britain's biggest retailer with almost 2,300 stores across the country. This week the firm said it was aiming eventually for a 10% share of the market for current accounts, which it will enter next year. It already offers credit cards and insurances at its stores, and plans to add mortgages too. Like the other new entrants, Tesco is finding that it is a struggle to build the information systems needed to run a full-scale bank. But it already has a strong branch network and a customer relationship with millions of consumers.

Since the failure of Northern Rock demonstrated the dangers of banks relying on the wholesale markets for their funding, they have taken a renewed interest in taking deposits from the public—though savers grumble that the rates on offer are still miserly. Several of the potential rivals to the existing big four—Virgin, Tesco and the Post Office, are trusted household names, so there is a fair chance consumers will consider them. But to get a significant slice of the banking market they will need to persuade the public to move their current accounts, not just savings accounts and credit cards.

Many people remain reluctant to do this, not least because the biggest banks benefit from a stronger implicit government guarantee. The main challenge for the new contenders, then, may be to persuade them shop around, just as they have learned in recent years to switch regularly between different providers of electricity, gas and telephone lines, to chase the best deals.